Venezuela default contagion can be easily contained – economists

PARIS: A looming Venezuelan debt default is unlikely to trigger any domino effect in neighboring economies as markets have long since priced in such an eventuality, economists say.

All alarm bells started ringing in the troubled South American country when the three major rating agencies—Standard and Poor’s, Fitch and Moody’s—further downgraded Venezuela’s credit ratings.

They see it as “highly probable” that the OPEC member will halt debt repayments, a week after President Nicolas Maduro called for a refinancing and restructuring of the country’s debt and Venezuela’s state oil company PDVSA missed payment on a $1.1 billion bond.

Debt restructuring entails at the very least an extension of repayment deadlines, and frequently a partial write-off.

A group of creditors could declare the missed PDVSA payment a “credit event”, thus triggering payment of credit default swaps that some investors buy to protect themselves, and would likely push the ratings agencies to further downgrade the nation.

If Caracas were to halt payments on all of its debt, it would be the biggest-ever state default, easily surpassing even that of Argentina, which suspended repayment of $100 billion of loans from private creditors.

The combined debt of Venezuela and its state-owned oil company PDVSA is estimated at close to $150 billion. Neverthless, the markets do not appear to be untowardly worried about the prospect, since a possible default has been looming for a number of years.

“This has been a such well-flagged slow-motion deterioration, many people in the markets have been expecting Venezuela to default at some point,” said Tony Stringer, managing director for sovereign debt at Fitch.

“It’s important to remember that the country’s troubles are mostly home-made and due to “bad economic management by President Nicolas Maduro”, added Venezuelan economist Orlando Ochoa.

“There is no risk of contagion,” he said.

Neighboring countries like Colombia have already absorbed the impact of a fall of their exports to Venezuela which has been cutting down on imports drastically for years to help with honoring its debts.

“There is, in fact, already a cordon sanitaire around Caracas which the Venezuelan government itself has put in place by limiting access to foreign currency, and therefore world trade, for businesses and individuals,” said Christopher Dembik, head of economic research at Saxo Banque.

A sentiment echoed by the International Monetary Fund which last month said the impact of the crisis on other countries was likely to be “minimal”.

Up to now, Caracas has managed to meet its debt repayments on time even as the price of oil, a mainstay of the economy, plummeted, and the economic crisis punctured growth and plunged the country into hyper-inflation.